Weak manufacturing reading sinks greenback

Strong U.K. retail sales data give pound big lift

By

WilliamL. Watts

LisaTwaronite

SAN FRANCISCO (MarketWatch) -- The dollar extended losses against major counterparts Thursday, after worse-than-expected manufacturing data from the Federal Reserve Bank of Philadelphia rekindled worries about the U.S. economy.

The Philly Fed diffusion index fell to -24 in February, while economists were expecting it to improve to -10. Read The Fed.

"Today's report indicated that regional manufacturing activity weakened further in February, and it also cast a pall over the next six months, as manufacturers sharply downgraded their expectations for future activity," wrote Omair Sharif, strategist at RBS Greenwich Capital, in a note to clients.

The dollar index, which measures the greenback against a basket of six major currencies, was at 75.615, down from 76.143 late Wednesday.

Separate data from the Conference Board showed the index of leading U.S. economic indicators dipped by 0.1% in January, as weaker stock prices and housing data drove the gauge to a fourth consecutive monthly decline. See Economic Report.

On the brighter side, the Labor Department reported Thursday that initial filings for state unemployment benefits continued to trend lower after spiking earlier in the month. First-time jobless claims declined 9,000 in the week ended Feb. 16 to 349,000, making their lowest level in a month. See Economic Report.

On Wall Street, stocks opened higher but reversed after the downbeat data. Major indexes were solidly lower in afternoon trading. See Market Snapshot.

U.K. retail data lift pound

Earlier Thursday, the British pound sterling surged after U.K. retail sales for January came in much stronger than expected.

The Office for National Statistics said retail sales rose 0.8% last month from December, making for 5.6% growth on a year-on-year basis. A Dow Jones Newswires survey of economists put the consensus forecasts at a 0.2% monthly rise and a 4.7% increase from January of last year.

Sterling spiked on the data, seen as potentially giving the Bank of England room to slow the pace of interest-rate reductions. Lower interest rates are typically seen as negative for a nation's currency in part because they erode the yield of investments in assets denominated in that currency.

Food stores saw sales volume rise by 0.7%, the Office for National Statistics said, while non-food stores chalked up a 0.4% rise in sales on the month. Stores selling household goods registered a 4.3% monthly increase, the biggest boost since August 2006, the government said.

Economists at Bear Stearns downplayed the strong headline figures, arguing that while aggressive discounting lured consumers during January, a credit crunch, the nation's housing slowdown and declining consumer confidence will weigh on sales in coming months.

Meanwhile, they argued that a benign price-deflator reading shows that worries about an inflation spike outside of energy prices are misplaced, telling clients: "These numbers should be consistent with gradual easing ahead with the next rate cut likely to be due in May."

Fed spillover for the greenback

The greenback's push higher was turned back after the Federal Reserve on Wednesday revised down its forecast for 2008 growth in the U.S. economy.

That reignited expectations the central bank will remain on an aggressive rate-cutting path to avert a severe downturn.

The yen was seen lower against most major currencies amid renewed interest in riskier "carry trade" strategies centered on borrowing in low-yielding currencies such as the yen and then using the funds to buy assets denominated in higher-yielding currencies, analysts said.

The dollar had gained ground against major currencies Wednesday, higher after a reading of stronger-than-expected inflation at the retail level for January. The consumer price index raised concerns the Fed might have to heed inflationary pressures and stay its hand regarding further easing of interest rates. See Economic Report.

Later Wednesday, the Fed projected headline and core inflation would increase at a faster pace in 2008 than it had forecast in October. The policy-setting Federal Open Market Committee also projected that growth in the world's largest economy would slow in 2008 to between 1.3% and 2.0%, down from the 1.8% to 2.5% forecast in November. Read The Fed.

"Since the FOMC still seems focused on downside risks to growth, the dollar remained under pressure overnight," wrote analysts at Commerzbank in a research note. "We maintain our view that the dollar should ease further on a broad basis in the wake of worsening U.S. data due for release over the coming weeks."

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